By David Randall
NEW YORK (Reuters) -Some of Tesla (NASDAQ:TSLA)'s institutional shareholders are getting out, convinced that the electric carmaker's days of dizzying growth are in the rear-view mirror.
The company's shares are down nearly 30% this year and have fallen by more than 50% since their 2021 high, wiping out some $600 billion in market value as CEO Elon Musk has struggled with fierce competition and falling sales. Tesla's first-quarter results missed analyst expectations, though Musk said the company would release new models in 2025 that would be more affordable.
"It started to feel like the fundamentals were becoming detached from reality," said John Belton, a portfolio manager at Gabelli Funds whose firm sold its entire stake of 65,900 shares - acquired in early 2022 - in the first quarter of the year. “We think the stock works best when there are auto company fundamentals that justify the stock price.”
Tesla's nearly 14-fold increase in its stock the last five years has conditioned investors to hold on during periods of adversity and accept valuations that are more in line with technology companies than carmakers. This time however, even some of the company's diehard believers have become skeptical that the same kind of expansion lies ahead and think Tesla's shares have become too risky. Tesla did not respond to a request for comment on this story.
Of the 18 mutual funds tracked by Morningstar that have held Tesla shares since 2019, 10 reduced their positions in the last quarter, with four slashing their stakes by 15% or more, Morningstar data showed. Only five added shares.
That doesn’t mean Wall Street has written off the stock. Nineteen analysts tracked by LSEG now have either a "buy" or "strong buy" rating on Tesla, up from 17 in February. The average price target among 49 analysts tracked stands at $178.95, about 1.5% more than the stock's closing price on Monday.
Others see it differently. Ross Gerber, whose Los Angeles-based firm, Gerber Kawasaki Wealth & Investment Management, bought 500,000 shares more than a decade ago, has been selling steadily this year.
"I think the story is over, is the best way to say it," said Gerber, who has whittled his position down to around 300,000 shares.
Gerber’s complaints range from Tesla’s public relations department, which he believes receives insufficient funding, to what Gerber calls Musk’s distractions by political and cultural issues.
"Over the last year and a half, Elon’s personal quests based on the way that he sees the world have superseded the interests of Tesla and its shareholders,” Gerber said.
Gerber believes the shares, which closed on Monday at $176.29, are fairly valued at $100, some 40% less than their current value, as long as Musk stays at the helm. He expects to give part of the remainder of his stock to charity to allay the tax consequences of selling, or use them to sell put options, which allows him to raise income without incurring tax penalties.
HIGH VALUATION
Nonetheless, Tesla remains the world's most valuable automaker, with a market capitalization of more than $560 billion. By contrast, Toyota (NYSE:TM), the world’s biggest automaker by volume, has a $333.7 billion market cap.
Tesla, however, trades at approximately 64 times future earnings, as of Tuesday morning, a multiple that exceeds the valuations of some tech high-fliers. Artificial intelligence darlings Nvidia (NASDAQ:NVDA) and Super Micro Computer (NASDAQ:SMCI), for instance, trade at 37.8 and 23.2 times earnings, respectively. Other automakers are valued far more conservatively. General Motors (NYSE:GM) trades at 4.7 and Ford (NYSE:F) trades at 6.4 forward earnings, while Toyota trades at 10.1.
Bullish investors justify Tesla's valuation with a long list of reasons, pointing to its technology and fervent fan base. More recent causes for optimism have been the company's continued push into fully-autonomous driving and in-roads into China.
"The Street is looking through this painful transition period for the long-term growth story to emerge for Musk & Co, with (self-driving) a key ingredient in that recipe for success," said Dan Ives, an analyst at Wedbush Securities who has a $275 price target for the stock.
Among the most fervent bulls is Ark Invest founder Cathie Wood, who has held Tesla in her ARK Innovation Fund since 2014 and increased her stake in the company by 10% over the first quarter, according to Morningstar data.
Ark estimated in April 2022 that Tesla will be worth $2,000 per share by 2027, with a bear case of $1,400 per share, largely due to the roll-out of its proposed robotaxi business. Wood has stood by that price target, buying roughly $100 million worth of new shares in April 2024, while telling CNBC that now "is not the time to run for the hills."
Musk recently announced on social media platform X a "robotaxi unveil" on "8/8," presumably meaning August 2024, and he later posted that going "balls to the wall" on autonomy was a "blindingly obvious" move. Last month, Musk said Tesla "should be thought of as an AI robotics company," not a carmaker.
Tesla remains ARK Innovation’s top holding, at nearly 12% of the fund's assets. The fund is down nearly 18% year-to-date, compared to a more than 10% gain for the S&P 500.
Critics, however, say self-driving vehicles are a risky bet because the technology faces engineering and regulatory hurdles. In an April report, Deutsche Bank said cracking the code on full driver-less autonomy represents a significant technological, regulatory and operational challenge.
That’s one reason why Graham Tanaka has liquidated the entire Tesla position in his $21.5 million Tanaka Growth Fund over the last six months. The fund owned the stock since around 2011, when it was trading at $2.
Instead, he has been buying shares of Nvidia, confident the chipmaking giant - whose stock has rallied more than 130% this year - will continue benefiting from excitement over the business potential of artificial intelligence.
"There's too much risk in Tesla when you've got a great play like Nvidia trading at half the valuation,” he said.